Refiners ponder a sweet-and-sour conundrum

The European Union's
ban on Iranian oil has pushed up the price of similar types of
low-quality oil as buyers scrabble for alternative
supplies.

Paradoxically, there are surprising bargains to be found for
refiners with the flexibility to purchase and process
higher-quality grades.

While the price of high-sulfur Russian Urals crude has risen
sharply since the embargo began on July 1, higher-quality
grades in the Mediterranean and West Africa have come under
pressure, providing some unexpected breathing room for at least
some European refiners.

Soaring crude-oil prices and weakening local demand for fuel
eroded profits for European refiners in recent years, resulting
in several high-profile shutdowns.

Eight European refineries, equivalent to
about 8% of the working refining capacity in the region in
the first quarter of this year, have closed since the start of
the economic crisis in 2008.

Now, refineries that are able to process light, sweet crudes
are increasingly taking advantage of the lower prices, traders
in the Mediterranean market said.

"All the Iranian crude is no longer coming to Europe and that's causing a relative
shortage of heavy grades versus light ones and is creating a
distortion in the market," said Massimo Vacca, head of investor
relations at Saras, an Italian refiner.

"Saras is lucky because we have a flexible refining configuration. In general,
not all refineries can easily switch from one grade to the
next."

European refiners have traditionally coveted high-quality,
sweet oil because it is easier to process into high-value
products such as gasoline.

As a result, it normally trades at a premium to oils with a
high sulfur content, similar in quality to Iran's crude, such
as Urals and Iraq's Kirkuk.

But the price of lower-quality crudes has been driven higher
this month because of the Iranian embargo, and low supplies and
delays in exports of Urals and Kirkuk.

At the same time, a surge in production of shale oil in the
US has reduced demand for light, sweet crude, while competition
remains high for heavier crude because of demand from high-tech
Asian refineries that can process it. And the resumption of
Libyan crude output has added to the glut of the light, sweet
crudes.

Iranian oil output fell by 100,000 bpd in June, compared
with May, to 3.2 million bpd because of US and European Union
sanctions aimed at pressuring Iran over its nuclear program.
This took Iran's oil production to near 22-year lows.

Morgan Stanley, in a note published Wednesday, said the loss
of medium-sour oil from Iran has pushed some refiners to shift
purchases toward cheaper and more-available light, sweet crudes
from the Atlantic Basin.

But not all refiners have the ability to easily switch
between grades of crude oil, and that is putting pressure on
them to acquire similar-grade oil from other sources. The
European Union, on average, took 800,000 bpd of oil from Iran
in 2011.

"The refiners will clearly switch to the grades that make
most sense economically if they can make it work, but in the
first instance they would look for crude of a similar quality
to ones that they normally process, which is why Urals and
Iraqi crude may be preferred," said Toril Bosoni, a senior
oil-market analyst at the international Energy Agency.

"Anecdotal evidence and prices indicate there is increased
buying of Urals to replace Iranian [crude], and it's a good
substitute quality wise."

In the last week, Urals traded at a premium of as much as 30
cents to the physical Brent benchmark.

"In the past, sweet was stronger, but nowadays the situation
is different," said one oil trader at a European refiner, noting that the
surge in production in the US has caused the export market for
light, sweet crudes to fall apart.

Dow Jones Newswires

Have your say

All comments are subject to editorial review.
All fields are compulsory.